Semi-Independent Working Life – Statutory Employees

Semi-Independent Working Life – Statutory Employees

by | Sep 23, 2021 | Business Tax, Individual Tax

Many businesses owners are familiar with independent contractors and employees carrying out the work needed for their business. Whether if it’s one-time projects or steady, consistent operations, businesses rely on both kinds of workers to get the job done. An interesting and uncommon category of employees who walk the line between the standard employee and independent contractor is the statutory employee. Employees by “statute”, employers do not have to withhold federal income tax on these employees. The statutory employee may also have access to additional tax deduction benefits individually. However, the worker must meet finely-specified criteria to be considered statutory employees.

Statutory Employee Categories

Laid out in Publication 15-A,  statutory employee status applies if it falls within 4 distinct categories and also meets the 3 conditions in regards to social security & Medicare taxes.

The 4 categories of employees that may be considered statutory employees are:

  • Drivers who distribute beverages or grocery products, or drivers who pick up and deliver laundry, if the driver is an agent paid on commission.
  • Full time life insurance sales agents whose principal business activity is selling life insurance or annuity contracts or both, primarily for one company.
  • Individuals who works at home on materials or goods supplied by an employer and must be returned or to a designated person, if furnishing specifications for the work to be done
  • Full-time traveling salesperson who works on an employer’s behalf and orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, and similar establishments. Goods must be sold for resale or supplies for the buyer’s business operations and must be the salesperson’s principal business activity.

Payroll Tax Considerations

FICA taxes, aka SS & medicare taxes, must be withheld if all 3 conditions apply for the aforementioned categories of statutory employees:

  • Service contract states or implies that substantially all services are to be performed personally by the statutory employee
  • The employee does not have a substantial investment in the equipment and property used to perform the services (other than an investment in facilities for transportation like a car or truck)
  • Services are performed on a continuing basis for the employer

FUTA taxes also apply to the business if the employee is considered as a statutory employee. However, it is worth noting federal income tax is not withheld for statutory employees, so businesses may find some advantage in not having to withhold for income tax from statutory employees. Statutory employees receive a W-2 form and are noted as “statutory employee” in check box 13. Additionally the statutory has access to using Schedule C and its wider array of deductions, as opposed to schedule A like most individual tax filers as well as not being subject to the 2% AGI threshold of Schedule A.

 

Statutory employees are unique cases that can come up in running a business. Having a knowledgeable team to understand and address these situations help free up owners to their main goal, growing their business! MiklosCPA strives to be that team and has helped many small and emerging businesses with their accounting and tax needs. Schedule a call with us to learn how we may help your business. Also, check us out on our social media pages for additional tax tidbits and interesting info.

 

Looking out for #1 – Self-Employment Taxes & the Deduction

Looking out for #1 – Self-Employment Taxes & the Deduction

by | Aug 13, 2021 | Business Tax, Individual Tax

Being a self-employed individual has unlimited earning potential and flexible schedules, but of course comes with some extra responsibilities. For our purposes, we’re referring to what’s understood as “self-employment taxes.” In tax speak, that refers to the Social Security and Medicare payroll taxes that would normally be withheld by an employer for their employees.

Self-Employment Earnings

As a self-employed worker, the individual now becomes responsible for both the “employer” and “employee” portions of the tax, currently at a rate of 15.3 % (12.4% for Social Security and 2.9% for Medicare, 2020) on combined earnings. The first $137,700 (2020) of earnings is subject to the Social Security portion of the tax, while the remaining 2.9% Medicare portion is not subject to a limit.

Self-Employment Deduction

You may have heard of a “Self-Employment Tax Deduction” that allows self-employed individuals use for their taxes. To clarify, this is a business deduction available to self-employed individuals that allow them to deduct the employer portion of their “employment tax” towards their federal income tax. In simpler terms, you’re using a portion of what would be your payroll taxes as a business deduction towards your income tax. Check out our article on the different tax types for more info.

File & Pay

Self-Employment taxes are reported on Schedule SE for the Form 1040. The self-employment tax deduction is reported on line 13 of Schedule SE and on Schedule 1, line 14 of the Form 1040. The deduction goes towards your adjusted gross income and can ultimately help lower your income tax.

 

Self-employment taxes are just an additional responsibility for the independent worker. However, individual business owners often have a full plate running their business and tax concerns may be on the backburner. Having some backup to handle those issues can free business owners to focus on their main goal, growing the business! Count on us here at MiklosCPA, a CPA firm focused on helping small and emerging business clients with their tax and accounting needs through the latest in “virtual office” operations. Give us a call to learn how we can help your business succeed, and don’t forget to subscribe to our social media pages.

Writing Tips to Polish Your Email Messages

Writing Tips to Polish Your Email Messages

by | Jul 12, 2021 | Individual Tax

The other day, I glanced at a social media ad promoting a webinar that would provide attendees “piece of mind.”  Tax season recently ended and I’m pretty sure my mind is (mostly) in one piece! Corny jokes aside, reading that message reminded me of the importance of proofreading and concise communication. Email messaging has become the main communication form for many professionals, especially as remote work becomes a permanent option. It is more important than ever to make sure your emails are clear and concise.

Writing from the foundations

In writing, it helps to think of it as a building process rather than one driven by spontaneous “a-ha” moments. So start from the foundations. Before you start to write, ask yourself who is your audience? Your support staff? A client? Start tailoring your email to the appropriate audience. Don’t put them in the “To:” box yet. If you intend to write a detailed email, try jotting down an outline of main points on an empty word document page, then build the details from the outline, and finally transfer it all to your email and link those points together with words. It’ll help keep your email on track and not turn into a rambling wall of text.

Review & Send Off

Once you’ve built your email draft, it’s time to refine it through review and edits! The old saying “good writing comes from re-writing” remains true. Re-read what you’ve written so far to yourself, aloud if possible, and think if it makes sense. Bring in another pair of eyes and ask a co-worker to read it over, if appropriate. After revisions, give it another re-read and whittle down any ambiguities or odd word choices. Once you feel what you have written is the best it can be, go ahead and hit that send button.

Common Errors to Avoid

  • Be wary of workplace jargon. It may help in quick messages within your team, but that habit may spill into emails to your clients or 3rd parties, leading to miscommunication.
  • Don’t try to bury your audience with thesaurus-picked words, you’ll lose your audience’s attention quickly. Remember to keep it simple.
  • On that note, make sure the words that you use are real words. In my earlier years, a co-worker once replied to a supervisor’s idea as “atriguing”
  • Don’t rely on spellcheck. Words like “they’re”, “their”, “piece”, and other often misused words can go undetected, so re-reading your email before sending is essential.

 

“Good writing comes from good reading”

A former professor of mine would often say this while explaining why we had to read a heavy stack of books for a writing class. The goal was that by reading those books, we would understand good examples of writing and incorporate them into our own styles. Similarly, reading good examples of emails and other communication in your workplace can help you develop your “voice” that will help your email communication.

If you’ve been following our posts for a while, you’re probably familiar with MiklosCPA’s focus on sharing accounting and tax-related articles put into simple, accessible bites of knowledge for our readers and clients. Once in a while though, it’s nice to touch upon other relevant subjects which our readers may find useful. If you’d like to know more how MiklosCPA can help your business, let’s have a chat. Also follow us on our social media pages for more future articles and other useful tax tidbits.

 

Some Useful Exclusions from Gross Income

Some Useful Exclusions from Gross Income

by | Jun 16, 2021 | Business Tax, Expat Tax, Individual Tax

Gross income, at the start of the federal income tax formula, includes many types of income. A whole assortment of income is considered taxable by the federal government, such as wages, gains made on property sold, interest income, and alimony received. Fortunately, some income items may be excluded from the gross income calculation. It’s safer to say the list of gross income exclusions is shorter than what is taxable. Utilizing exclusions properly may help in your income taxes. Below is a list of several notable exclusions from gross income.

Principal Home Sale Exclusion – The capital gains made on the sale of a residence may be excludable up to $500,000 (married filing, jointly). However, several criteria must be met to be excludable, such as the property must be the principal residence of the taxpayer and certain occupancy timeframes must be met (check our article for more info).

Foreign Earned Income Exclusion – Income earned while working abroad may be excludable from gross income, but it must meet either the bona fide residence test or the physical presence test for earnings and other income made overseas to be excludable.

Gifts & Inheritances – Gifts received are generally considered excludable from gross income. However, if the gifted item is later used to produce income, the gift may be considered taxable. Donors of gifts may be required to pay a gift tax if the value of the gifted item passes a certain threshold.

Life Insurance Proceeds – Proceeds received by a beneficiary are generally not included in gross income if the amounts are paid due to the death of the insured person.

Retirement Income (such as social security) – A portion of retirement income may be excluded from gross income, but the amounts may depend on your filing status and sources of income. For social security benefits, up to 85% of it may be taxable.

The option to exclude certain kinds of income can help lower your gross income, and ultimately what you may owe on your tax bill. Utilizing exclusions and tax credits can help both individuals and businesses keep their tax bills reasonable. As a CPA firm focused on helping clients with their accounting & tax needs, MiklosCPA also enjoys sharing these “good-to-know” articles for our visitors and those wanting to learn more of our services. Follow our social media pages for future articles like this one and other interesting tax tidbits.

The Child Tax Credit – Tax Relief for Working Families

The Child Tax Credit – Tax Relief for Working Families

by | Apr 19, 2021 | Individual Tax

The Child Tax Credit (CTC), first enacted through the Taxpayer Relief Act of 1997, has helped provide tax relief for many qualified families over the years. It currently offers a credit of up to $2,000 (2020) per qualified child and persons who may not meet the requirements of a qualified child may qualify for an alternative Other Dependents Credit (ODC) with a smaller credit limit of $500 per qualified person. The credit until recently was nonrefundable, but new legislation has enabled it to be partially refundable, up to $1,400 per child. To claim the credit, a taxpayer must have a qualified child dependent. Who qualifies?

Qualified Child Credit & Other Dependents Credit

For a child dependent to qualify for the Child Tax Credit (CTC) for a taxpayer’s return, the dependent must meet all the following conditions:

  • The child must be a relative of the taxpayer (e.g., son, daughter, stepchild, eligible foster child, or even a younger sibling or nephew in some cases).
  • Child must be under the age of 17 at the end of the tax year.
  • The child does not provide for over half of their own support during the year.
  • The child lived w/ the taxpayer for more than half of the tax year.
  • The child was a citizen, national, or resident alien.
  • The child has a valid Social Security Number (SSN).

In some cases, a dependent may not meet all the criteria, such as a college student who goes to school part time. In that case, they may qualify for the Other Dependents Credit (ODC). To qualify:

Limitations

Naturally, some limits exist on claiming the Child Tax Credit. Currently, taxpayers cannot claim CTC if their modified adjusted gross income (AGI) exceeds $200,000 (2020) if single, or $400,000 (2020) if married, filing jointly. They also cannot claim it if line 18 (which consists of various taxes from other forms) on the Form 1040 is less than the total number of CTC & ODC credits.

Recently, the Child Tax Credit and other tax credits have seen some overhauls in legislation that will affect the upcoming tax year. Business owners should be savvy to such sudden changes, but sometimes running a business can be a labor in itself. Which is why owners rely on the “business health” advice of trusted accounting firms, such as us here at MiklosCPA. We are a California-based CPA firm that supports many small and emerging businesses with their accounting and tax needs. Want to know how we can help your business? Let’s talk. Also follow our social media pages for future articles and other useful “good-to-know” tax tips.

 

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Income Tax Tandem – Alternative Minimum Tax for Individuals

Income Tax Tandem – Alternative Minimum Tax for Individuals

by | Mar 26, 2021 | Individual Tax

 

Regular federal income tax rules can quickly get complicated. Now imagine, an additional layer of rules and complexity kicking in for taxpayers in certain income tax brackets! Say hello to the Alternative Minimum Tax (AMT).

Tax Tandem

AMT essentially is an income tax that operates alongside regular income tax. It sets a floor of “minimum tax” to pay and requires qualified taxpayers to calculate their tax liability twice, once under the regular rules, then again under the rules in AMT. The taxpayer must then pay the higher amount. AMT primarily affects high-income earners that leverage assorted tax exemptions, credits, and other advantages that in normal tax rules would often leave them with no tax liabilities. In the eyes of elected lawmakers that enacted AMT, these taxpayers were “not paying their fair share of tax.” AMT also use to exist for corporations as well, but was repealed with the Tax Cuts & Jobs Act of 2017.

Do I owe AMT?

You actually have to figure that out by calculating it through Form 6251. After entering your taxable income from line 15 on your Form 1040, you proceed through Part 1 re-calculating assorted “preference items” to tally up to your Alternative Minimum Taxable income (AMTI). Some notable preference items to be recalculated include:

Then your AMTI is deducted by the exemption, which changes each year (for 2020, $72,900 for single, $113,400 for married filing jointly). If that number is greater than 0, you owe AMT and must proceed further to calculate the tentative minimum tax (TMT) owed. If TMT is greater than the tax you owe through the regular income tax rules, you must pay that higher TMT.

Second Chances

Another way to look at Alternative Minimum Tax is that it is a “second chance” for being taxed. However, some foresight and planning around those preference items can help keep that “second chance” down to a minimum. Often times, many of those “qualified” for AMT have other concerns, such as running their emerging business. Knowledgeable tax advisors can guide owners through their AMT concerns and business accounting concerns. Looking for an advisor? Look no further than us here at MiklosCPA. We are a California-based accounting firm that supports many emerging businesses with their tax and accounting needs. How can we help you? Let’s chat. Follow our social media pages for future articles and other interesting tax tidbits.

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